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Business Interruption Insurance – Financial Conduct Authority Test Case

Business interruption insurance is in the spotlight, with many Irish businesses (particularly in the hospitality sector)  instigating High Court or arbitration proceedings where  insurers decline to cover losses due to the COVID-19 crisis.  

In a UK test case, the Financial Conduct Authority (FCA) is seeking, in order to protect policyholder interests, a declaration from the English High Court that the named defendant insurers’ policies cover business interruption losses arising from the pandemic. 

In anticipating the outcome of actions against Irish insurers and following publication by the FCA of the particulars of its claim on 10 June 2020, we consider developments in the UK test case against eight different insurance companies ahead of its scheduled trial date of 20 July 2020.

What is being argued?

The FCA, adopting the perspective of a typical policyholder, claims that the insurance policies issued by the defendant insurers (subject to proof of loss and policy terms) are sufficient to cover the events of COVID-19 and the UK government’s response in imposing a lockdown which led to the interruption in the business of various policyholders.  In their defence, the insurers contend that, unless businesses ceased to trade completely, the insured cannot recover under a business interruption policy.   The insurers submit that such policies never contemplated an event such as the COVID-19 crisis and to construe the policy in this way would be at odds with the intention of the parties at the time of inception.  The FCA disputes this and counters that unless evidence is supplied whereby the insured party was notified that such an infectious disease would not be covered, then the contra proferentum (i.e. ambiguity in a contract is construed against the person who drafted the contract) rule must be applied.

The FCA is seeking declarations along the following lines:

  1. that COVID-19 was present as a disease as of a specific date;
  2. that COVID-19 was present in specific areas;
  3. that COVID-19 was classified as a threat to human life; and
  4. that COVID-19 endangered the welfare of humans generally.

It is the FCA’s claim that the above criteria, if approved by the High Court, would oblige insurers to pay out on the policies because the necessary ‘pay-out criteria’ would be met under each policy.  The four criteria were extrapolated from sample policy wordings (available online) provided by business interruption insurance policy holders in dispute with their insurers and on whose behalf the FCA is now pursuing the defendant insurers.

In refuting the FCA’s claim, the defendant insurers submit that a typical policyholders’ loss would not ‘follow’ or ‘result from’ or were not sufficiently directly or ‘solely and directly’ caused by the necessary local disease occurrence.  Instead they were the result of the wide-area pandemic, the fall in economic activity resulting from a general loss of confidence, or national government measures, and so cover for such claims is not triggered.  The insurers argue that all or most loss would have been suffered anyway, even but for the insured peril/business closure (for example, because of the broader COVID-19 pandemic, the lockdown, self-isolation, social distancing, the fall in economic activity resulting from a general loss of confidence, or other national measures imposed by the UK Government). The FCA disputes these defences.

Unlike in the Irish cases (which are being taken by affected policyholders rather than the regulator), the English High Court is not being asked to make assessments as to quantum of damages.  The FCA’s claim seeks clarification that the sample policy wordings cover business interruption loss as a result of the COVID-19 crisis on the basis that this would provide legal clarity to the insurance industry and also a legal basis for the FCA to mandate insurers to pay-out should it wish to do so.

What might the impact be in Ireland?

The expedited timeline laid out for the FCA case could be significant for Irish insurers who are defending business interruption claims.  While the judgment of the English High Court will be legally binding in England only, it may provide persuasive guidance to the Irish Courts in assessing Irish proceedings and claims respectively.  Having considered the FCA case sample policy wordings it is likely that similar (though not identical) policy wordings may have been used by Irish insurers in their business interruption policies.

Irish insurers have stated that they do not believe their policies extend to cover this type of pandemic. However, if the English courts decide that insurers needed to provide advance notification to policyholders of this position in order to validly exclude cover for the pandemic, Irish insurers will have to consider the impact of this if they plead such a defence.

See our previous article Insurance Industry Faces Emerging Litigation Threat for a broader consideration of the issues discussed above.

What next?

Central Bank governor Gabriel Makhlouf has indicated that the CBI is considering initiating similar proceedings to the FCA’s. However he has not provided any meaningful detail on the CBI’s considerations, so it is an item to be kept under review.

Insurers facing business interruption claims will be keeping a close eye on developments as they occur domestically and in the UK. For now, they should also be mindful of the importance of adhering to their existing claims handling processes and to applying good governance to all aspects of  their claims handling ; for example the oversight by  Boards of Irish authorised insurers should be conducted in accordance with the Central Bank’s Corporate Governance Requirements and , where relevant,  the requirements of the Consumer Protection Code and outsourcing requirements should be followed. In addition, the Central Bank of Ireland (CBI) may conduct thematic inspections and it is advisable that insurers conduct their claims handling  mindful of the possibility that the Central Bank will be reviewing their conduct.

If you have any queries on business interruption insurance and associated regulatory issues, please contact your usual William Fry contact or a member of our Insurance & Reinsurance team.

Contributed by James Grogan